Cut to milk price forecast hits income.

Fonterra has fallen into line with market expectations after oversupply and extreme volatility on world dairy markets prompted the co-operative to once again lower its farmgate milk price forecast for 2014/15.

The co-operative yesterday cut its forecast farmgate milk price for the current season to $4.50 a kg of milk solids from $4.70, having shifted it to that level in December from $5.30, and lowered the advance rate of scheduled monthly payments to its farmers. The 20c downward revision alone was estimated to lower farm incomes by about $370 million.

Fonterra said it now expected to produce slightly more milk this season despite the effects of this year's drought.

Westpac economists estimated that the decline in dairy prices would mean a near $7 billion reduction in dairy farm income, across all the dairy companies, compared with last season.

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Combined with a previously announced estimated dividend range of 20-30c a share, the forecast amounted to a cash payout of $4.70 to $4.80 for the current season -- below DairyNZ's estimate of break-even for most farmers of $5.40 a kg.

Oversupply issues continue to dog the market thanks to the lifting of the European Union's quota system on April 1, increased supply resulting from import bans by Russia, and higher production coming from the United States and New Zealand.

In addition, demand from the country's biggest customer, China, remains slack, with trade data out this week showing whole milk powder exports dropped by 29 per cent in the year to March.

John Wilson said Fonterra had confidence in the long-term fundamentals of international dairy demand. Photo / Richard Robinson
John Wilson said Fonterra had confidence in the long-term fundamentals of international dairy demand. Photo / Richard Robinson

Chairman John Wilson said the lower milk price forecast reflected significant volatility in international dairy commodity prices caused by oversupply in the market.

"We have confidence in the long-term fundamentals of international dairy demand, however the market has not yet rebalanced and GlobalDairyTrade [auction prices] for products that inform our farmgate milk price have fallen 23 per cent since February," Wilson said.

Read more:
Westland Milk cuts payout forecast
AgriHQ revises down farmgate milkprice forecast

Farmers benefited from a record payout of $8.50 a kg last year, and payments from that season have extended into the current year. Economists said farmers could weather one bad season but that two bad seasons in a row would cause problems.

AgriHQ this week revised its forecast farmgate milk price for 2015/16 down to $5.70 a kg of milksolids from a previous forecast of $6.50.

ANZ rural economist Con Williams said cash flow would soon become an issue for farmers if low prices persisted.

"We are watching farmers' cash-flow situations and 2015/16 is going to be a lot more difficult for the sector to navigate because that's where it starts to bite from a cash-flow point of view," Williams said. "It's basically New Zealand and Europe going head-to-head in key secondary markets at the moment and New Zealand is really missing Chinese markets, and the latest trade data really bears that out."

ASB Bank rural economist Nathan Penny said local production had suffered a lag effect of the season starting off at $7 a kg - at the time offering a green light for cashed-up farmers to produce more and spend more on supplementary feed - which pushed up output.

Overproduction issues aside, Penny said China was the big unknown.

"That to me is the biggest issue - Chinese growth."

Fonterra's announcement caught the market by surprise, as most were not expecting an update to be issued until the end of the month.

Chief financial officer Lukas Paravicini said it was important that farmers were updated at this point of the season.

"There is still a lot of volatility as we come to the end of the season."

See recent movements in the GDT auctions here:

Westland Milk this week cut its forecast payout for the current season to $4.90-$5.10 a kg of milk solids.

Lower prices are also making their presence felt in Europe.

Holland's FrieslandCampina said its guaranteed price for raw milk for May is € 32 ($46.9) per 100kg of milk - down € 1.25 from April.

It said: "The reduction of the guaranteed price is based on the expectation that milk prices of most reference companies in May will continue to decline."

Dairy Drop:

• Farmgate milk price forecast drops to $4.50 a kg from $4.70, taking the payout, with dividend, to a $4.70 to $4.80 range.

• Payout is below DairyNZ's estimate of a break-even of $5.40 a kg.

• Westpac estimates the decline in prices will mean a nearly $7 billion fall in dairy farm income, compared with last season.

• New Zealand production estimated to be 1.45 per cent higher than last year's record season.